By Tyler Gallagher, CEO and founder of Regal Assets, an international alternative assets firm with offices in Beverly Hills, Toronto, London and Dubai.
In today’s uncertain market, entrepreneurs and business owners are starting to pay attention to precious metals as a safe haven in their investment portfolios. Gold and silver assets proved to be prudent financial investments in a year that turned out to be more tumultuous and disruptive than anyone could have predicted.
Don’t take my word for it. Just look at the numbers. Silver’s year-to-date (YTD) gains sit at about 44.6% at the time of writing, and gold is up 23.8%. Even the U.S. equities market, which broke all-time highs this fall, is only up 14.6% by comparison.
Price movement across precious metals can be explained by two primary forces. First, risk-averse investors are flocking to gold and silver as a safe, recession-proof store of value. The second factor is global supply disruptions brought on by the Covid-19 pandemic.
If you’re an entrepreneur looking for exposure to relatively low-risk asset classes, now is the time to consider precious metals investing. As the founder of an online alternative asset company, I’ve helped countless global clients do just that this year. To date, the results have been extremely positive. I’ll recap just how great 2020 was for precious metals and share my opinion on the market environment for this new year.
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Precious Metals 101: Why Should Entrepreneurs Care?
Gold and silver are powerful hedges against systemic risk and uncertainty in financial markets. Historically, when global equities decline in value, the prices of gold and silver fare better. This was true during the dot-com bubble of the early 2000s, the global financial crisis of 2008 and now again during the 2020 coronavirus recession.
In the period from October 9, 2007, to October 1, 2010, during the height of the financial crisis, the price of gold rose by 78.9%, whereas the S&P 500 fell by 20.1%. The early stages of the coronavirus pandemic, between December 1, 2019, and March 1, 2020, saw gold rise by 7.6% while the stock market sank 19.8%.
As the Fed cut the federal funds rate in response to the economic downturn, wealth started to leave the stock market and funnel into gold. This a hedge against equities market risk and inflation risk as quantitative easing (QE) and rock-bottom interest rates flood the money supply and, in the long run, can lead to higher inflation.
The point is, recessions and the responses of sovereign governments can wreak havoc on the value of your stocks as well as your cash. If you’re running a business and want to weather the storm in the long term, gold has a track record of holding its value over time and can provide your business with liquidity when it needs it the most.
Gold In Review: Eclipsing Another All-Time High
The price of gold reached its highest-ever point on August 7, 2020, when it traded for $2,067 per troy ounce. Although gold has currently cooled down to the high $1,800s, it’s up significantly from its opening price on the first day of the year, when it traded at $1,519 per ounce.
Despite a short-lived decline in value in mid-March, gold steadily climbed through the first half of 2020 as investors sought stability outside of the equities market. Several confounding factors played into the positive price movement for gold in 2020, including:
• Trade tensions between the U.S. and China.
• Global supply chain disruptions.
• Public debt rising to unprecedentedly high levels.
• Instability in the U.S. equities market.
• Political unrest and uncertainty in the U.S.
• Depressed pre-Covid-19 commodity prices.
Notably, global demand for gold sits at its lowest level since Q3 2009. This indicates that supply-side factors brought on by the ongoing pandemic have influenced gold’s price positivity. Should manufacturing activity increase in 2021 with the widespread distribution of the Moderna and Pfizer/BioNTech vaccines, it stands to reason that industrial demand for gold will increase in step and push the value of the commodity higher.
Silver: A Red Hot Rally In 2020
Silver prices hit a seven-year high when they breached $29.14 an ounce in early August. In contrast with gold, physical silver demand is up 65% through the first three quarters of 2020.
Above all, disrupted silver mining operations have contributed to $8.8 billion in losses in precious metals output in the first half of 2020 alone. The closure of mining operations especially affects silver, which saw 101 mines shutter due to the Covid-19 pandemic.
Overall, silver is poised for its strongest year-over-year gains since 2013, according to a November report from the Silver Institute. Like gold, expansionary monetary policy has also been responsible for much of silver’s growth, and further fiscal stimulus in the new year is likely to continue applying upward price pressure on silver.
Price Positivity Ahead For Precious Metals In 2021?
Some of the world’s biggest financial institutions are taking long positions in precious metals, including Warren Buffett’s and Ray Dalio’s firms. Despite undergoing price corrections in Q3, precious metals look to carry their upward momentum forward amid increased central bank liquidity, near-zero federal rates and government stimulus in the new year.
The meteoric rise of gold and silver in 2020 was precipitated by uncertainty in traditional financial markets. Many of those factors still remain today. This is especially true of silver, whose market price will disproportionately benefit from an uptick in industrial manufacturing in the year ahead.
Global debt levels now surpass $255 trillion. Distressed public balance sheets reflect the need for sound money and safe stores of value, both of which gold and silver have a history of providing.
At present, all signs point to a continued, though more modest, bull run for precious metals in the year ahead. Savvy entrepreneurs would do well to consider adding them to their investment portfolios to hedge against monetary and market risks.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.